Wednesday, December 12, 2012

Will BCE Follow Verizon on Pensions?

BCE Inc., Canada’s largest telephone company, reiterated its full-year sales and profit forecast and said it will add $750 million to its employee pension plan.

BCE expects 2012 revenue growth to be at the lower end of the range of 3 per cent to 5 per cent it gave as a target Aug. 8. Earnings excluding severance, acquisition and other costs should be $3.15 to $3.20, the Montreal-based company said in a statement. The pension contribution will come from its year-end cash balance.

BCE has been using excess cash to refinance bonds, pay down debt and shore up its pension plan amid stiffening competition both from its traditional rivals and new wireless operators in central Canada. BCE competes with Rogers Communications Inc. and Telus Corp. in providing mobile-phone service, cable TV and Internet packages to Canadian consumers.

Phone company Verizon has transferred $7.5 billion in pension obligations to Prudential Insurance after a retiree association failed to convince a court to stop the move.

Members of the Association of BellTel Retirees sued in federal court in Dallas two weeks ago to stop the deal, saying it would weaken the legal protections for retirees. It effectively turns the company’s defined-benefit pensions into annuities to be paid by Prudential. Annuities aren’t covered by the federal Pension Benefit Guaranty Corp.

On Friday, the judge ruled that the retirees had failed to show they were likely to be harmed by the deal.

Curtis Kennedy, a lawyer for the plaintiffs, said they will likely appeal that decision. If they win on appeal, the companies may have to unwind some of the deal, he said.

“The legal issues are most significant for not only the group of affected Verizon management retirees, but for all corporate American retirees whose pensions are presently being sponsored by their former employers,” Kennedy said.

The Verizon plan covered 41,000 management retirees.

New York-based Verizon Communications Inc. has said that the deal lowers the risk that its pension obligations will end up costing more than projected.

U.S. District Judge Sidney A. Fitzwater in Dallas today denied a request by two retirees who worked for a Verizon predecessor to issue an order stopping the deal, saying they failed to show a “substantial likelihood of success on the merits” of their case.

The transaction, under which the retired managers’ plan would be converted to an annuity, would strip them and about 41,000 other beneficiaries of the protections of federal law and cause irreparable harm, they said in lawsuit filed Nov. 27.“Plaintiffs have failed to establish a substantial likelihood that Verizon has a specific intent to interfere with their rights,” Fitzwater wrote in his opinion today. “They do not offer a rebuttal to Verizon’s proffered legitimate, nondiscriminatory reasons for defining the group of retirees for the annuity contract.”

Verizon, the second-largest U.S. phone company, said on Oct. 17 that it planned to shift about one-fourth of its pension obligations to Prudential to remove risk from its balance sheet. The New York-based company has said the beneficiaries’ lawsuit is without merit and it may be harmed if the transaction isn’t completed by Dec. 10.

‘No Say’

Curtis Kennedy, an attorney for the retirees, said today that his clients should have been given “a voice and a choice,” as General Motors Co. beneficiaries were when their plan was transferred to Prudential.

“Verizon’s style was to do a ‘cram-down,’ giving retirees no say in the matter,” Kennedy said in an e-mailed statement. Fitzwater’s ruling will probably be appealed, the lawyer said.

“While we cannot immediately stop the Verizon/Prudential annuity transaction from going forward next week, all of the parties may, eventually, be faced with a need to unwind some of the deal,” Kennedy said.

In his 15-page ruling, the judge rejected the plaintiffs’ claims that by transferring the whole of their pension to just a single entity, Prudential, Verizon was breaching its fiduciary duty to diversify plan investments to minimize risk.“This argument relies on characterizing the annuity contract as an investment instead of a distribution of benefits,” Fitzwater said. “But plaintiffs offer no support for their position that the fiduciary duty to diversify investments applies in this context.”

Protected Interests

Ray McConville, a spokesman for Verizon, said by phone today that the company is pleased with the court’s decision.

“Verizon’s actions regarding its pensions protect the interests of our retired management employees,” the company said in a Nov. 29 statement. “The monthly pension benefits of the retirees receiving an annuity from Prudential will remain unchanged.”

The unit of Prudential Financial Inc. (PRU), the second-largest U.S. life insurance company, is also a defendant in the suit. In a Dec. 5 filing, the Newark, New Jersey-based company told Fitzwater the plaintiffs’ pensions will remain safe and urged him to reject their request to block the transfer.

“Prudential has paid retiree benefits under group annuity contracts and other arrangements since 1928 without interruption,” according to the filing.

Dawn Kelly, a Prudential spokeswoman, declined to comment today on the judge’s ruling.

The case is Lee v. Verizon Communications Inc., 12-cv-4834, U.S. District Court, Northern District of Texas (Dallas).

The case is interesting because it sets a legal precedent for other companies to follow Verizon's lead and offload billions in pension obligations to insurance companies.

Who benefits from these deals? Corporations and insurance companies. Pension risk transfers are a boon to insurers which is why I'm long shares of any insurance company aggressively expanding in this area.

Hell, I'm long most insurance companies, including AIG, which was bought hard by a number of top hedge funds last quarter. These guys knew what they were doing. Free from Uncle Sam, AIG needs to get down to business, and if I were them, I'd focus my attention on pension risk transfers (AIG is not in the annuity business).

But what about workers and retirees? Are they better off? When you read “the monthly pension benefits of the retirees receiving an annuity from Prudential will remain unchanged,” you might think, what's the big deal?

The big deal is that companies are dismantling their defined-benefit plans, offloading pension risk to insurers, and these beneficiaries will no longer have the protections of the federal law in case of a bankruptcy. I could be wrong, but all these pension risk transfers seem too "clean, easy and without risk."

If that's the case, then why aren't more companies offloading pension risk? Why is BCE injecting billions into its pension plan? Are they that dumb or are they concerned about offloading pension risk to some insurance company?

Bell Canada says it plans to make a $750-million payment toward its defined benefit pension plan to help improve its funded status.

The company says the payment will be funded from cash on hand at the end of 2012.

It says the pension pre-payment is tax deductible and expects to realize $200 million in tax savings in 2013.

The pension plan's financing costs will benefit from the stronger position of the plan and therefore will help increase earnings by two cents per share starting next year.

"Accelerating the funding of Bell's future pension obligation is an efficient use of our cash given the backdrop of a persistently low interest rate environment," said Siim Vanaselja, chief financial officer at BCE and Bell Canada.

"With this contribution, which preserves the pension plan's funded status at a high level, we expect Bell's normal pension funding and cash income taxes for 2013 to be maintained at a similar level to 2012. This action both de-risks the pension plan and improves Bell's longer term financial flexibility to enhance returns to our shareholders through reduced future pension funding requirements and expense."

As a result of the payment, BCE reduced its projected free cash flow for the year to between $1.6 billion and $1.75 billion from an earlier projection of between $2.35 billion and $2.5 billion before the pension payment.

As you can see, BCE isn't offloading pension risk. This is a voluntary contribution to shore up its DB plan. Smart move!

Below, Timothy Massad, the U.S. Treasury Department's assistant secretary for financial stability, talks about the final offering of American International Group Inc. shares following the 2008 rescue of the company by the government. He speaks with Erik Schatzker and Stephanie Ruhle on Bloomberg Television's "Market Makers."

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You can reach me at any time at LKolivakis@gmail.com. I am an independent senior pension and investment analyst with years of experience working on the buy and sell-side. I have researched and invested in traditional and alternative asset classes at two of the largest public pension funds in Canada, the Caisse de dépôt et placement du Québec (Caisse) and the Public Sector Pension Investment Board (PSP Investments). I've also consulted the Treasury Board Secretariat of Canada on the governance of the Federal Public Service Pension Plan (2007) and been invited to speak at the Standing Committee on Finance (2009) and the Senate Standing Committee on Banking, Commerce and Trade (2010) to discuss Canada's pension system. You can follow my blog posts on your Bloomberg terminal and track me on Twitter (@PensionPulse) where I post many links to pension and investment articles as well as my market thoughts and other articles of interest.

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